Coinbase Objects to SEC Proposal to Regulate Decentralized Exchanges


“Conventional regulations cannot be applied to DEX”
US crypto asset (virtual currency) exchange Coinbase submitted a letter to the US Securities and Exchange Commission (SEC) on the 13th. Opposed proposals to regulate decentralized exchanges (DEXs) in the same way as centralized exchanges.
This is a comment on the proposed regulation published by the SEC. Coinbase Chief Legal Officer Paul Grewal, who wrote the letter, explained the intent:

Yesterday we filed a comment letter on the @SECGov proposed rule that seeks to expand the definition of exchange to include DEXs. Tl; dr: this proposal should NOT be adopted, and certainly not before completing the threshold steps for any rulemaking. 1/11 https://t.co/fBXAYiWb4W
— paulgrewal.eth (@iampaulgrewal) June 14, 2023

The SEC’s proposed rule, intended to expand the definition of an exchange to include decentralized exchanges, should not be adopted.
It is not possible to require decentralized exchanges to register their businesses in the same way as domestic stock exchanges. Asking for the impossible is a violation of the Administrative Procedure Act (APA).

What is a decentralized exchange (DEX)?
A decentralized exchange built on blockchain. It is also called “DEX” from “Decentralized EXchange”, which is an English translation of “decentralized exchange”. Since transactions are conducted directly between parties without going through a central administrator, there is no need to pay a fee to the administrator, and other features include low liquidity and the user managing the private key.
Cryptocurrency Glossary

In the letter, Grewal said the SEC did not explain how the rules would be applied, given the nature of existing rules making it seem impossible to apply them to decentralized exchanges. The SEC simply states that it “applies,” he continued.
It also alleges that the SEC has not changed its stance, even though Coinbase and other companies have specifically pointed out the non-compliance and substantive problems with these rules.
Problems with the SEC Proposal
Grewal explains how decentralized exchanges differ from traditional exchanges, including the following:

Although truly decentralized systems exist, there is no single organization that can be held accountable for compliance. The fact that a person or group can provide any information about a decentralized exchange does not mean that they are in a position of equal standing and should have the same obligations as the operator of a centralized exchange.

He also explained that once a decentralized exchange is launched, changes to its specifications are usually only made by agreement between governance token holders.
Decentralized exchanges are sometimes operated by decentralized autonomous organizations (DAOs), but these organizations do not have a centralized coordination system or hierarchical leadership, and therefore are “controlled” for purposes of securities law. It is said that it is different from the subject.
The SEC argued that a “group” could be found to govern the exchange, but added that it had not defined what a governing body actually looked like.
Grewal said that in the case of a truly decentralized system, the only “group” the SEC might regulate would be the group of governance token holders.
However, not every token holder has the environment to exercise a wide range of compliance obligations, no single person manages a decentralized exchange, and neither a securities professional nor a relevant He pointed out that he is not an executive officer of a company.

What is a governance token?
A token for users and other stakeholders to vote on the operation of a decentralized protocol.
Cryptocurrency Glossary

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